Monday, November 15, 2010

A recurring claim in doomer literature is that our economy must either grow or collapse. This claim is frequently made on peak oil and doomer websites, like theoildrum.com, energyresources.net, and elsewhere. It's also frequently re-iterated by adherents of the "ecological economics" school of thought such as George Mobus.

The growth-or-collapse claim has an argument which runs like this. In our economy, debt is extremely widespread. The government has debt, corporations have debt, and individuals have debt. But debt is nothing more than a requirement to pay more money in the future. The only way we'll be able to pay more money in the future, is if we have more money in the future, through economic growth. Without growth, we cannot possibly pay additional money in the future, because there will be no additional money in the future with which to pay. Therefore, an economy with widespread debt must either grow or collapse.

Or so goes the argument. This argument (which I've called the "growth-or-collapse" argument) is extremely widespread in doomer circles. It's rarely spelled out in any great detail. Usually, it's presented very briefly or just assumed. Nevertheless, it comes up very frequently in doomer literature.

Unfortunately, the growth-or-collapse argument is false. It relies upon two mistaken assumptions, outlined below.

First, the growth-or-collapse argument relies upon the implicit assumption that all our income is devoted to debt servicing. Only then would we require more money in the future to avert collapse. At present, however, we (including our government) devote only a small fraction of our income to debt servicing. As a result, we could continue to make debt payments despite no growth in income by sacrificing consumption spending. Let me give an example. Suppose someone (we'll call her Alice) makes $50,000 per year and takes out a loan of $5,000, payable in one year with 10% interest. In other words, she owes $500 more at the end of the year than the value of the loan she took out. As it turns out, Alice doesn't receive an expected pay raise. Nevetheless, she must pay back $500 more at the end of the year. Is she bankrupt? No, because she can pay her debt by sacrificing a small fraction of her consumption. Only about 1% of her income is devoted to paying interest, which is less than her discretionary spending, so she would not face bankruptcy even if she underwent a relatively severe contraction of her income.

What about people who are so heavily indebted that they cannot possibly pay their debts using their current income? What about people who bought million-dollar homes and could not afford any of the payments without an increase in their salaries? Only those people require income growth to avert bankruptcy. By the way, that situtation is not faced by our government or most of our corporations. At present, our government pays only a relatively small fraction of its income for debt servicing and therefore does not require any growth in revenues to avoid default; and the same goes for the vast majority of corporations and people.

But there are some people and corporations who require growth in their incomes to avert bankruptcy. Do they face collapse? Will they cause the collapse of the whole economy?

No. That's the second mistaken assumption of the growth-or-collapse argument: it conflates bankruptcy with collapse. Bankruptcy is nothing more than a transfer of ownership of assets from one entity to another, along with a legal debt cancellation. Nothing more. It does not imply collapse, not even for the entity declaring bankruptcy, much less for society more generally. For example, assume a manufacturing corporation which cannot pay its debts and which declares bankruptcy. It's assets are transferred from stockholders to banks and bondholders who now own the company, and its debts are cancelled. The bondholders will continue to run the company if it's profitable without the prior debts. The new owners have no more incentive to destroy its assets than the previous owners did. In other words, bankruptcy and debt have no effect whatsoever on whether factories will continue to run. Bankruptcy changes ownership, that's all. The only time a company is dissolved, and its factories closed, is when it's not needed anymore, because its products or factories are obsolete or there's a surplus of the products it supplies. For example, GM almost dissolved because of competition from many other automakers who provide the same kind of products, so GM is not necessary in the world at all, any more than AMC was in the 1980s. (Even if GM had been allowed to fail by the US government, it still wouldn't mean collapse in the doomer sense of that word, because its capital equipment (like factories and machine tools) would be sold to competitors who would increase their production. Again: bankruptcy is a transfer of ownership, even in the case of legal dissolution, which is rare. Bankruptcy is a paper procedure which has nothing to do with physical destruction or collapse).

In short. The growth-or-collapse argument is false. It relies upon two implicit assumptions, both of which are false. It would be refuted if either of its assumptions were false, but both of them are false.

The economy requires no growth to survive. It could continue along with 0% growth for decades or longer, despite loans at interest, without any risk of collapse. (In fact, that very situation is what happened almost everywhere for the vast majority of human history, without any society collapsing from debts). In fact, the economy could withstand declining income because debtors could continue to pay their debt by sacrificing other expenditures. Furthermore, those who are forced into bankruptcy cause nothing more than a paper transfer of ownership and legal procedures of debt cancellation. As a result, debt poses no risk of economic collapse and does not create a requirement for growth.

None of this concedes that economic growth is at an end. Economic growth has not ended, and is not ending anytime soon. But that's a topic for another article.

Friday, October 8, 2010

Oil production in any region follows a bell-shaped curve. In any region, the rate of oil extraction increases, after the initial drilling, until it hits a peak, and then inevitably declines thereafter. This is true for any given oil well, and may be roughly true for all oil in the world as well.

Peak oil refers to the point at which half the oil in the world has been used up.1 At that point, we've extracted half the oil which which will ever be extracted, or which can be profitably reached. Thereafter, we will face inevitable declines in oil production as time goes on. Once oil has started to decline, little can be done to reverse the trend in the long run. We cannot increase the rate of extraction, because it costs more and more money just to extract the same amount of oil. Even if we furiously increase the rate of oil extraction, using any means necessary, all we accomplish is to make extraction faster now but even more difficult in the future, because we drained even more oil out of the ground. Once oil starts to decline, we are on a downhill path, basically without exception or reprieve. We will run out of oil, albeit gradually, and nothing can be done about it.

We may be nearing the peak of oil production for the world. After that, oil production worldwide will start its slow, inevitable decline. Some experts claim that oil has already peaked, in 2005, while others claim that oil will peak more than a decade in the future. Either way, peak oil is relatively imminent.

Some commentators think that peak oil spells doom for our civilization. They have an argument, which runs as follows. Our entire industrial civilization relies upon oil: our cars run on oil, our trucks run on oil, our tractors run on oil, and so on. As oil becomes scarcer, which it will after the peak, we will become increasingly unable to provide fuel for essential machinery like tractors. We will find it more and more difficult to sustain long-distance transportation networks for goods, or provide fuel for our supply chains. Our industrial civilization will start to falter. Goods will become scarcer, and the essentials of life will become harder to come by. This could lead to "feedback loops" in which people could rebel, wars could break out, and so on, which could damage our oil infrastructure still further. Even if peace is maintained, reduced oil supplies mean that we'll have less oil to spend on transporting oil from the middle east to us. Yes, even oil extraction and transportation depends on oil, which means that a decline in oil supplies will make us less able to extract more oil in the future, further accelerating its decline.

Our civilization must collapse, doomers say, as oil supplies dwindle. It's a fact, implied by laws of physics and mathematics. As oil supplies decline, food supplies will also decline, since industrial agriculture is dependent upon oil.

We cannot transition to alternatives, because those alternatives require oil to build them and supply them, when oil is already running out. Not to mention, it would take decades to transition our infrastructure to alternatives, when peak oil is already upon us. It's already too late to transition to alternatives, because we needed to start decades ago. Now that peak oil is upon us, we face only one prospect: collapse.

Or so goes the argument. This argument (which I'll call the "oil doom argument") has gained tremendous influence. While still a fringe argument, it has convinced thousands of people. It has inspired many people to prepare for doomsday, to hoard food, to practice survival skills, to relocate to rural areas and live off the land, and so on, all in preparation for the coming collapse. The oil doomer argument has also inspired hundreds of books, websites, lectures, documentary movies, blogs, and so on, with ominous-sounding names such as "die-off", "twilight in the desert", "life after the oil crash", "a world made by hand", and so on. The oil doom argument has even gained the attention of the NY Times, which published a long article about it. The argument has even convinced a few scientists, and at least one Congressman.

Oil doomers generally believe their argument is unquestionably correct. They believe that the decline and collapse of our civlization is absolutely inevitable, implied by physical and mathematical laws. They generally think that anyone who denies it, is "in denial", using the perjorative psychological sense of that term.

There's one problem, however. The oil doom argument is wrong. It's totally wrong, from beginning to end. It relies entirely on incorrect assumptions, as I'll point out. Without those assumptions, its conclusions no longer follow.

Below I'll present an analysis of the oil doom argument. I'll show that it's mistaken, and I'll present a more realistic picture of our probable immediate future.

Analysis of the oil doom argument

The oil doom argument relies upon an incorrect assumption. It relies upon the assumption that our economy will sacrifice the most important uses of oil first as the supply of oil declines. In fact, our economy will sacrifice the least important uses of oil, at every stage of the oil decline. As a result, we won't begin to sacrifice things like tractors or oil transportation infrastructure until our oil supply has already declined by 80% or more, which won't happen for six decades at least, according to the most pessimistic projections. In other words, we can withstand declining oil supplies for decades with no collapse, and with no major interruptions in basic industry, even if we make no preparations, and even if we do not make any transitions to any alternatives. Oil declines would cause alterations in our standard of living, but they would not cause industrial or agricultural collapse.

The reason our economy will sacrifice the least important usages of oil first, is because consumers demand what is most important to them, which causes producers to sacrifice production of what's least important when they must choose between several options. That in turn causes suppliers to shift production, and so on, through a widening network until it reaches the whole economy. Agents in the economy communicate via prices, and everyone sacrifices what's least important. Consumers have some choice about this, but producers do not: any producers which sacrifice essential things, or which manufacture things deemed unnecessary in a new economy, will go out of business. You can see this easily during a recession. When the economy contracts by 10%, does our supply of food decline 10%? No. The first things that go away are jewelry stores at malls, which die off right away in every recession then come back. As another example, look at what happened during the late 1970s. When our supply of oil declined by 15%, quite suddenly, did it cause 15% of the tractors to stop running? No, it caused a recession and some annoyance, but no collapse of our transportation infrastructure, and no starvation.

Again and again, doomers wrongly assume that we'll sacrifice the most important uses of oil first. Let me provide an example. The following quotation is taken from the website LifeAfterTheOilCrash.net, which is one of the premiere doomer advocacy websites:

"Within a short time of global oil production hitting its peak, [the prices of oil will reach] up to, and possibly over, the $200 per barrel range... With oil at or above $200 per barrel, gasoline will reach $10 per gallon... This will cause a rapid breakdown of trucking industries and transportation networks which have all been built and financed under the assumption fuel prices would remain low. Importation and distribution of food, medicine, and consumer goods will grind to a halt as trucking and shipping companies go bankrupt en masse."

Again, this wrongly assumes that we'll sacrifice the most important usages of oil (like food, medicine, and shipping) first. Of course, we won't begin to sacrifice food, or its production or distribution, until oil supplies had declined by more than 90%, because food is the most essential thing to us, and we spend less than 10% of our oil on food and its distribution.

As a result, declining oil supplies won't cause the imminent collapse of our civilization. But that's hardly reassuring. Perhaps peak oil will cause a gradual decline and collapse, if not an immediate one. Maybe we'll shut off the tractors in 80 years, when oil is almost out. Maybe we're doomed to protracted collapse, with gradually declining living standards until we starve, decades in the future.

No. As oil becomes scarcer, we'll gradually replace it with alternatives which have become relatively cheaper. We'll replace SUVs with hybrids, and eventually, we'll replace hybrids with battery-electric cars. The transition away from oil will be entirely automatic, the result of basic market mechanisms. It will not require any preparation or forethought on the part of everyday consumers. All that will be required, is for consumers to respond to higher oil prices. As oil becomes more expensive, alternatives will become relatively cheaper, and consumers and firms will transition to alternatives at that time, merely by following economic incentives.

Some commentators claim that it's already too late for us to transition to alternatives, because peak oil is already upon us, and it takes decades to transition away from oil. However, they've wrongly assumed that we must complete the transition away from oil before declines begin. That's their second mistaken assumption. In fact, we only need to transition away from oil quickly enough to offset declines as they occur. In other words, if we want to offset a 2% yearly decline in oil supplies, we only need to reduce our oil consumption by 2% per year after the peak has occurred. We could accomplish that easily. For example, we could switch 4% of our car fleet to hybrids the first year, then switch 4% of the remaining non-hybrid fleet every year thereafter. (Hybrids get twice the mileage, so switching 4% of them per year will result in a 2% decline in oil consumption, which is the same rate as the oil decline). In other words, switching 4% of our car fleet to hybrids is sufficient by itself to offset declining oil supplies of 2% yearly, for 25 years, without any reduction in personal travel and without any preparation beforehand by consumers. Switching 4% of our car fleet to hybrids is hardly a daunting task, since we already turn over our car fleet much faster than that, without any special inducement. Of course, this strategy requires automakers to design hybrids beforehand and to start mass manufacture of hybrids before the peak occurs. But they've already made that preparation.

Of course, other consumers of oil (like shipping companies) would also have to reduce their oil usage by 2% per year, starting after the peak has occurred. But they also could accomplish it by transitioning only a small fraction of their fleet per year to more-efficient technologies. Shipping companies also have obvious alternatives to their conventional propulsion, which they will start using when it becomes economically sensible to do so. The only usage of oil which has no obvious alternative is aviation, but that is not required to prevent industrial collapse.

If anything, automakers and others have responded too aggressively to the prospect of oil declines. Chevrolet and Nissan started working on plug-in cars years ago, in anticipation of more expensive fuel, and it looks like they prepared too soon. Plug-in cars won't be strictly necessary for decades, since regular hybrids would suffice for a long time after the peak. Furthermore, plug-in cars won't become cheaper than hybrids like the Prius (on a TCO basis) until gasoline costs more than $8/gallon, which doesn't appear imminent. Bear in mind that we shouldn't start switching from hybrids to plug-in cars until gasoline costs $8/gallon (in 2010 dollars), making the arrival of plug-in cars extremely premature.

One objection to all this, is that alternatives (like hybrids) require an "investment" of oil, since we must use oil to power the machinery which mines the lithium for use in batteries. Since we're running out of oil, doomers say, we won't have enough oil to mine lithium for hybrid cars. Once again, this assumes that we'll sacrifice the most important uses of oil first. But the foundation for the next generation of our transportation infrastructure is more important than discretionary travel now, so we'll sacrifice discretionary travel. The reason is easy to see: when we pass peak oil, investment in alternatives will promise fantastic returns, even though manufacturing those alternatives requires relatively little oil. As a result, those alternatives will have enough money to buy the small fraction of oil they need despite declining supplies. As a result, we will respond to declining oil supplies by sacrificing a few SUVs, not lithium mining.

Conclusion

The oil doom arugment relies on two implicit assumptions, as follows. First, it assumes that the economy sacrifices the most important uses of oil first as supplies of oil decline. Second, it assumes that we must transition the entire transportation fleet to alternatives before the peak occurs. Both of those assumptions are false.

Doomers make those assumptions, over and over again, throughout the doomer literature. Watch out for it. Once those assumptions are dropped, because they're wrong, the doom-and-gloom conclusions found throughout the doomer literature no longer follow. Bear in mind that imminent collapse arguments require both of the aforementioned assumptions to be true, but neither of them are true.

In summary. Our civilization does not face collapse because of peak oil. Our civilization faces gradual transition to other forms of energy for transportation, that is all. The gradual transition will happen automatically, as a result of basic market mechanisms, without any preparation on the part of consumers.

This is not to say that peak oil will have no consequences. I expect that peak oil will cause a recession and modestly higher transportation costs. It will not, however, cause industrial collapse, nor will it cause starvation within the industrialized world.

NOTES:

1This assumes that the curve of worldwide oil extraction will be symmetrical, as the Hubbert curve clearly indicates, and as doomers assume. Whether this is true or not has no serious implications for the argument I'm making here.

Monday, September 27, 2010

EROI, or "energy return on investment," refers to the amount of energy we get in return for some amount of energy invested. It's a ratio of energy return for energy investment. For example, if we spend 1 unit of energy on building an offshore oil rig, and the rig yields 5 units of energy over its lifetime, then it has an EROI of 5:1, or just 5. In other words, it has "paid back" 5 units of energy for every unit of energy invested. As another example, assume I walk one mile and burn 200 calories, in order to acquire some stawberries which have 400 calories. In that case, the stawberries had an EROI of 2, because they yielded twice as much energy as was spent in acquiring them. Usually, EROI refers to industrial sources of energy generation, like coal-burning power plants, windmills, etc.

Various kinds of energy generation have different EROIs. For example, a typical coal-fired power plant has an EROI of 30, which means that it yields 30 times as much energy over its lifetime as it took to build it and supply it with coal. Other forms of energy, like wind and solar, have lower EROIs. Corn Ethanol is the worst, since it yields only about 20% more energy (EROI of 1.2) than was spent in manufacturing the fertilizer to grow the corn.

Over time, the average EROI for all energy sources has been falling steadily. It was about 100 in the early 20th century, and has fallen to about 30 now. It's continuing to fall. The reason is because we have "used up" the easiest sources of energy first, and must turn increasingly to lower and lower quality sources of energy thereafter. For example, we used up the shallow oil first, and now we must dig deep wells (at great energy expense) to get more oil. EROI is falling and will continue to fall, and probably will never again reach the heights experienced in the early 20th century.

There is an argument that declining EROI will cause the destruction of our civilization. The argument runs as follows. As EROI declines, we must spend more and more of the energy available to us, on generating more energy. As a result, the amount of energy left over, for our uses, is less and less. In other words, net energy (which is the amount of energy left over after subtracting energy investment) must decline as EROI declines. It's an inevitable physical fact. At some point, EROI will decline so far that we won't have enough energy left over to sustain our industrial civilization, at which point, civilization will collapse, and we'll revert to a medieval mode of life.

Or so goes the argument. This argument (which I'll call the "energy decline argument") was first advanced by Prof Charles Hall, who is a professor of ecology at SUNY. He first articulated the argument several decades ago. He also invented the concept of "EROI" at that time, and pointed out that EROI was precipitously declining. Since then, the energy decline argument has gained many adherents. It has achieved a widening influence. Recently, it has inspired an impressive number of books, articles, papers, websites, lectures, and so on, all claiming that energy flows will soon decline and that civlization must decline thereafter.

The problem with the energy decline argument is that it's totally wrong. It's wrong from beginning to end. It relies on incorrect implicit assumptions, and it reaches incorrect conclusions.

In this paper I will refute the energy decline argument by showing that its assumptions are wrong. I will show that EROI is unimportant and does not threaten our civilization. I will also show that energy is abundant and will grow over time.

ANALYSIS OF THE ENERGY DECLINE ARGUMENT

The fundamental problem with the energy decline argument is this: it implicitly assumes that the rate of energy production is constant. In other words, it assumes that we have a constant number of power plants in the world and cannot build any more. If that were true, then the energy decline argument would also be true. If the amount of energy we generated were constant, then declining EROI would, in fact, imply declining net energy, because we would have to spend a larger fraction of the fixed amount of energy available to us in acquiring more of it. However, the assumption is false; in fact, the amount of energy we produce is not constant. We can build more power plants. As a result, we can easily compensate for declining EROI by just building a few more power plants to compensate for the EROI decline, while still generating the same net energy output. In other words, the assumption underlying the energy decline argument (namely, that enregy supply is constant) is wrong, and therefore the argument is false.

Let me provide a simple example. Suppose we have a 1000-megawatt coal-fired power plant with an EROI of 10; in other words, it produces 1000 megawatts continuously over its lifetime, and it consumes 1/10th that amount (100 megawatts) continuously over its lifetime. Now assume that we are running out of coal to supply that power plant, and must replace it with lower-EROI power plants. So we replace it with two 1000-megawatt solar thermal plants with EROIs of only 5 each. Despite a reduction of EROI by half, we still have increased total energy output by by almost 80%. (The high-EROI plant produced 900 (1000-100) megawatts of net energy, but the two low-EROI plants combined produce 1600 (1000-200)*2).

Each power plant with an EROI higher than 1 is an energy multiplier1. It multiplies the energy available to us, because it produces moreenergy than it consumes. With each power plant we build, we multiply the total amount of energy yet again, albeit by some small factor. From this fact, it's clear that we can produce any amount of energy we wish, by multiplying often enough (building more power plants), regardless of EROI. This reasoning follows from simple arithmetic: you can reach any number you wish, by multiplying by any factor higher than 1, provided you can multiply as often as you wish.

In fact, the energy available to us can grow exponentially with any EROI higher than 1. The reason is because the output of any plant can be used to build several other plants, each of which can then be used to build several more plants, and so on. For example, we can use the output of a single power plant, to smelt the iron ore, manufacture the components, and make the hydrocarbons necessary for the construction of several more power plants. In that way, we can increase the amount of energy available to us exponentially, with any EROI higher than 1. In fact, our society has already done that. We've already used the output of power plants to build more power plants. That's how we were able to increase the amount of energy generated in this country (USA) by a factor of ten in the six decades from 1920-1980, despite never having invested more than a small fraction of our energy in acquiring more energy.

Let me provide an example of what I mean. Suppose we build one power plant with a very low EROI of 8. We use the full output of that plant to build another 8 plants just like it and adjacent to it. Then we use the full output of the other 8 plants, to build an additional 64 power plants, and so on. After ten generations, we'll have about 1 billion power plants, without any outside investment of energy except what was needed to construct the first plant. Of course, we can't really build a billion power plants. At some point, we would reach the maximum theoretical amount of energy we could generate. However, that maximum amount is enormous and is more than 1,000 times higher than current worldwide energy production, so we won't reach it any time soon.

The only practical limits to energy generation are imposed by cost and demand. Cost and demand determine how much energy we can generate, not EROI. Cost and demand are the only reasons we don't quadruple our energy output in short order.

Nor does it matter if EROI declines. At present, we have an average EROI of about 30, which means that we spend only 3% of our energy in acquiring more energy. If our EROI fell by half, we could compensate for it by building ~3%2 more power plants, thereby keeping total energy output the same. (Assume 100 power plants, 3 of which are used to generate the energy needed to power the others. Now assume EROI falls by half, and the 100 power plants require twice the energy input for the same output. In that case, we would require 6 power plants (rather than 3) to supply the others. So we would then require 103 power plants (rather than just 100) to compensate for a 50% decline in EROI while keeping output constant).

Nor is there any reason to believe that EROI will decline any further in the future. The dramatic decline in EROI experienced during the 20th century was a one-time event which is now over. The reason is because there is exponentially more energy available at lower EROIs. At an EROI of 100, which is very high, there was a small amount of energy available, which was exhausted within a few years; but at an EROI of 15, which is much lower, the amount of energy available is practically limitless. As a result, the average EROI for the world will probably never decline below 15.

Nor should we bother to pursue higher EROIs. Higher EROIs don't necessarily lead to larger total energy production or lower cost. Larger total energy production would be achieved by pursuing the cheapest (in money) sources of energy, not the ones with the highest EROI. (By "cheapest" I mean the lowest-cost net energy). Cheaper energy leads to greater demand, which leads to more construction of power plants at that cost, which leads to higher total energy production and lower costs despite lower EROI.

The irrelevance of EROI is demonstrated by history. As doomers like to point out, EROI was about 100 in the early 20th century and has declined to about 30 now. During that time, we increased worldwide energy production by more than ten-fold, and increased per-capita income in the advanced countries by more than eight-fold. In this case, declining EROI didn't imply declining net energy (quite the opposite). Nor did it destroy the economy, nor constrain production. EROI made no difference.

SUMMARY

We do not face declining energy flows. Quite the opposite, we have virtually unlimited amounts of energy available to us. We could increase the amount of energy we generate, practically without limit, subject only to cost and demand. Energy production can grow exponentially, which allows us to generate any amount of energy we require.

Declining EROI is not particularly worrisome. We can easily compensate for declining EROI by building a few additional power plants, thereby keeping energy output constant. For example, we could compensate for a 50% decline in EROI by building only about 3% more power plants.

Even if declining EROI were destructive, EROI is not declining much any more. EROI will probably never fall below an average of 15, over any time scale, because there are vast amounts energy available at that EROI.

EROI doesn't matter. It doesn't matter if it's increasing or decreasing. It doesn't matter that it decreased in the past. It doesn't cause decreasing energy flows, nor does it limit our energy generation, nor does it threaten our civilization. As long as EROI remains higher than 1, which it always will without any special effort on our part, it makes no difference. All that matters are cost (of net energy) and demand.

NOTES:1 When we multiply energy, we're really only multiplying the amount of usable energy, like mechanical energy, electrical energy, chemical energy in food, and so on. We don't really increase or decrease the amount of energy in the universe. In fact, when we "generate" energy, we're really only converting energy, from a non-usable kind into a usable kind. Power plants multiply the amount of usable energy.

2 This figure is an estimate. In fact, we would need to increase the number of power plants by slightly more than 3% to compensate for a decline of EROI from 30 to 15.